Ever wondered how lenders check your credit score? Find out all about how credit reference agencies work here!
There is a lot of information available on the Internet and in newspapers about financial matters. However, in spite of this fact many people do not know what a credit score is. Or, how it can affect the amount of choices available to them when they apply for credit or financial products like credit cards, mortgages or personal loans. In basic terms, your credit score is worked out by analysing your credit files. I.e. the credit ratings agencies look at how often you have borrowed money, the amount you have borrowed and how you have paid it back. This information is used to calculate the amount of risk that a responsible lender will take on if they offer you a line of credit.
Over the last four decades, the use of credit ratings agencies has increased to a huge extent. Now, they are used by many organisations other than banks or finance companies. If you want to take out a mobile phone contract, buy some insurance, buy a car on finance or take on a tenancy agreement, then your credit score will be looked at and will be used to assess whether or not you are a good enough risk. The way the credit score is calculated in very complex but it boils down to what is called a binary option. I.e. whether you have had bad debt or no bad debt. In some instances agencies will offer a prediction about the chances of you getting into bad debt in the future. However, this is not very reliable and most credit reference agencies will just use past data to create your credit score.
Using the past credit history of a person will show up useful information such as how much was borrowed, over what period of time and whether or not instalments were paid on time. It will also show if the person missed any payments. It will also record if you have paid back the amount you borrowed earlier than required. However, not many people realise that if they have not had any credit at all it can also reflect badly when they apply for some. Having no track record for debt is deemed almost as bad as having had bad debt.
You cannot underestimate the importance of a good credit score in the modern world of borrowing. If you have applied for credit and have been turned down, this will be recorded and can affect your score. If you have ever had a County Court Judgement for non payment of a bill like Council Tax or if you have even missed just one payment of a loan it will be recorded. This is bound to lower your credit score. A bad credit score means you will be unlikely to be offered a mortgage, a new credit card or any form of personal loan. Obviously, if you have declared yourself bankrupt, your score will be practically non existent.
The three main agencies in the UK that lenders consult for credit scores are Experian, Equifax and CallCredit. These credit reference agencies charge a fee to lenders who use their services. Lenders such as finance companies and banks have an account with the agency. Every time they use the service, the agency charges them accordingly. Other people who use the agencies like landlords, who want to establish whether or not a potential tenant is a good risk, will pay a one-off fee for information. Anyone can apply to the agencies to find out about their own credit score and credit history. This will reveal whether your score is a true reflection of your borrowing and payment record or whether there are any incorrect entries.
Credit reference agencies are all regulated by the newly formed Financial Conduct Authority. As such, this is the organisation to approach if you feel that your credit score is wrong or if there is incorrect information recorded. There can be instances where lenders have recorded the wrong details about debts against your name. This can result in a low credit score. Fortunately, you can challenge the information if you think it is incorrect. For example, if someone who previously lived at your address shows up as a bad risk it can reflect on your reputation. The way to avoid this particular situation is to make sure that your details are on the electoral roll. Also, make sure that you ask them to remove the previous occupier.
You can also object if you think that the agency has made a mistake about recording late payments or missed payments. Human error can always occur and it is sometimes the case that the agency does have wrong details recorded. You can ask them to remove these incorrect details. If the agency does not assist you or does not comply with your request you can approach the FCA to help put the matter right. It is helpful if you can provide documentary evidence to show your side of the story.
Read more about the history of online loans and credit here.